COMMENT: U, V, W not quite as easy as learning the ABCs

U, V and W: Theyre not just the 21st, 22nd and 23rd letters of the alphabet. They also represent three competing theories on the current downturn and where the economy might be heading in 2012.

The biggest question is whether we have hit bottom yet. As the surveys and stories in this issue show, confidence is low in the metals sector as the new year gets under way. Most respondents to AMM surveys believe a full economic recovery is still two to three years away.

Yet for most of 2011, the signs were beginning to point up. Auto sales rose, metals prices were up, steel mill demand was climbing and scrap prices were soaring to record or near-record levels. If nothing else, some stability had returned to some sectors of the market. But that began to change during the fourth quarter.

As 2011 headed into the holiday season, many in the metals sector were losing some of the swagger they displayed earlier in the year. Despite months of strong demand and climbing prices, starting in October the metals sector experienced some negativity. Some finished and semi-finished steel prices began to drop a bit, as did the values of other metals. Ferrous scrap prices, which essentially spent February to September in a static, high-value zone, began to drop, including a precipitous decline in November. Service centers went into a protective mode on inventory issues. And the mood began to turn from sanguine to dark.

Which brings us back to U, V and W.

U: n this scenario, the economy slips to a bottom level that is wide enough to require some momentum to escape. Because of this, the economy could appear to stall for a time before a real upturn takes place. Some say the current doldrums represent exactly this economic behavior.

V: or a time, this was the most popular theory in describing the 2008 downturn. Under this model, the economy slides quickly and deeply downwardwhich happened in 2008before starting a long, steady climb back up. While some signs suggest this is still a possible path for the current recovery, statistics and other signs should have been stronger by now if the recovery was going to be quick and sharp.

W: his is the one holding the most currency right now. In this scenario, the economy turns sharply downward and hits bottom before seemingly starting to recover, but after a few optimistic signs appear things take another turn for the worse and head down again before a final, truer recovery later.

What is uncertain is where 2012 really will take the economy. But one thing is certain: Given all of the variables, understanding the UVWs is not quite as easy as learning the ABCs.

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